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The Cultural Gifts scheme and Acceptance in Lieu Annual Report for the year ended 31 March 2025 (the 'Report') has recently been published by Arts Council England. Transfers to the nation included artworks, furniture, family archives and even a collection of fossils. Hunters were delighted to have been involved in 5 out of the 32 offers made in lieu, as per the report.
So what is the Government's Acceptance in Lieu ('AIL') scheme, and why might it be beneficial?
The AIL Scheme
Introduced in 1910, the AIL scheme enables taxpayers to gift culturally pre-eminent assets to the nation, in full or partial settlement of an estate's inheritance tax ('IHT liability'). Around 30 estates a year make use of the scheme, which prevents items being sold privately, sometimes to buyers outside of the country, to fund an estate's tax liability, instead passing into the ownership of the nation for the benefit of all citizens.
Items must be of particular historical, artistic, scientific or local significance to be accepted by the scheme, either individually or collectively, or when associated with a building in public ownership (such as a National Trust property), i.e. they must be deemed to be 'pre-eminent'. HMRC's heritage team carries out initial checks, following which experts on the Arts Council England's AIL panel will consider if the object satisfies its requirements for pre-eminence, condition and provenance, as well as agreeing the item's market value.
If satisfied, the panel will recommend that the Secretary of State for Digital, Culture, Media and Sport approves the AIL application. The object will be allocated to the most appropriate public institution and the estate's tax liability is reduced by the market value of the item less the notional IHT due on it, but adding the 'douceur', which can be 25% or 10% of the notional IHT depending on the type of asset.
The tax benefit of donating an object through the scheme, rather than selling it on the open market and paying the IHT, is thus approximately 17% (or 16.66% to be precise). For example, if as part of an estate administration artwork agreed with the Arts Council as being worth £500,000 was accepted by the scheme, there would be an inheritance tax credit of £350,000 for the estate i.e. (£500K x 60%) + (£500K x 40% x 25%).
If the scheme was not used and the item was instead sold for the same value to pay IHT, the IHT attributable to the artwork would be £200,000 (i.e. £500k x 40%) and there would therefore be £300,000 left after the payment of IHT to be distributed in accordance with the deceased's Will. As alluded to above, the tax benefit is therefore £300,000 x 16.66% = £50,000. If the artwork was simply left to charity in the Will, the non-charitable beneficiaries would in the above example receive £350,000 less compared to if the scheme was used.
In addition to the tax benefit, the costs of a private sale of the object, including VAT and agents' fees, are also saved. From experience, these can be around 20% of the sale value, so such savings can be significant.
The Cultural Gifts scheme
The Cultural Gifts scheme is equivalent to the AIL scheme, but used to offset income tax and/or capital gains tax ('CGT') during the donor's lifetime rather than IHT (companies can also reduce their corporation tax liability by applying to the scheme).
Applications for the Cultural Gifts scheme are made to the Arts Council England, following exactly the same process as per the AIL scheme (though each scheme has a separate budget).
Tax relief of 30% of the agreed value of the object is granted to individual donors, who can choose to use the relief against their income tax or CGT liability, or a combination of the two. The relief can be spread over five years, starting with the tax year in which the donation was registered under the scheme.
For both the AIL and Cultural Gifts schemes, the donor can specify preferences as to which institution should receive the donation, although these wishes are not binding. While context is a key consideration, for example, if the object is historically linked to a specific property, the Secretary of State will also ensure public access and regional spread is maximised.
Considerations and conclusions
Assets can, of course, be gifted in lifetime or on death to registered charities, free from IHT. However, as per the example above, a gift of a culturally significant item to charity would result in the non-charitable beneficiaries receiving considerably less than if the AIL scheme were used.
There is a misconception that only fine art will be accepted under the schemes, but a diversity of material is accepted, from textiles to county records. Collections ranging from Stephen Hawkings's complete office to the Spitting Image archive (including original puppets, board games and letters of complaint from irate viewers) have been accepted under the AIL scheme and a read of the Report also shows that far more than just fine art was accepted through the schemes in 2024/25.
This goes to show that these schemes are incredibly flexible, and no matter how unusual an item or collection may appear, it is always worth investigating whether it could enrich the nation's public collections, especially at a time when funding for institutions' acquisition budgets has been slashed.
Making gifts in lieu should, however, not only be seen as a way of mitigating tax. It is about leaving a legacy, reflecting your family's history, and the satisfaction of knowing that future generations will have access to prized heirlooms, cared for by the institution they are given to.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
